Why Bubble Predictions Don’t Carry Any Weight- Damian Collins

There has been a lot coverage in the media about a so-called ‘property market bubble’, which has caused concern amongst some investors in Perth.

They are questioning whether the market is ‘overheated’ and whether values could be set for a major correction.

For me, the ‘property market bubble’ is one of the most overused and misunderstood metaphors in real estate. It’s an idea that is largely perpetuated by misinformed journalists and publicity-hungry economists from near and afar.

There is no clear consensus on what a bubble actually is, but the term generally refers to a condition of unsustainable growth in property values driven by irrational exuberance. The idea is that the bubble could easily ‘pop’ at any moment.

The Perth property market is certainly not characteristic of a bubble, and any suggestion of such is wrong. Here are some of the reasons I believe we’re not in a bubble:

Australia is not just Sydney and Melbourne

Much of the talk about a bubble has related either directly or indirectly to the situation in Sydney and to a lesser extent Melbourne. This is because of the strong growth experienced by these cities in recent times and because many media publications are very east-coast centric by their nature.

Anyone who bothers to read beyond the superficial headlines knows that there isn’t a single ‘property market’ in Australia and that each city, suburb or area can have unique characteristics and drivers.

Housing debt

One sure sign of a bubble, we are told, is when households are heavily indebted and unable to service their loans. But we’re not seeing this at all. Debt servicing ratios (which show the proportion of a family’s income that goes to servicing loans) are at relatively low levels.

Plus, many borrowers are ahead in the repayment having built up a buffer in recent years. The rate of non-performing loans (i.e. defaults) is also very low.

Recent growth

The Perth market experienced growth in values over the course of 2013, but beyond that, growth hasn’t exactly been spectacular. Look at the last 5 years when growth has averaged just 4.3% per annum, only slightly above inflation. Hardly bubble territory.

Remarkable resilience

The Perth market (along with those in the other capital cities) has proven to be remarkably resilient over the course of recent history. Consider the major economic events that each triggered a flurry of ‘crash’ predictions. [sam id=43 codes=’true’]

We’ve had the Global Financial Crisis, the horror of 9/11, the Asian Currency Crisis of 1997, the recession we had to have in the early 1990s, the stock market crash of 1987 and so on. During all of these occurrences, people predicted a crash and they were wrong.

While some property markets have struggled at times (many of which later recovered), on the whole we’ve successfully weathered many storms. This has to speak volumes about the strong fundamentals of the market.

Population growth driving demand

One of the major drivers of the property market is population growth and it’s no secret that Perth is the fastest-growing capital city in Australia. According to the Australian Bureau of Statistics (ABS), the population increased by 3.5% (67,500 people) between 2012 and 2013. Amazingly, 395,000 people moved to Perth between 2006 and 2013.

Supply not keeping up

Although there is some debate as to whether or not Australia is building enough homes, new supply remains very much insufficient in Perth. According to dwelling approval figures analysed by RP Data, we are building around one new home for every 3.45 new residents in Perth. The latest Census data shows the average household contains only 2.6 persons, meaning supply isn’t keeping up.

Furthermore, a proportion of the new dwellings built are simply replacing existing homes that have been demolished and therefore aren’t adding to the housing stock. And the figures also include holiday homes and second homes, further highlighting the deficiency.

Strong economic foundations

The underlying foundations of the Western Australian economy are sound. We have an abundance of natural resources, world-class industries and are strategically positioned to take advantage of the massive growth in Asia. It’s no wonder that our residents have become amongst the wealthiest in the country.

Although mining investment has moderated, it is still pretty impressive. A quarter of a trillion dollars is being invested in the state, mainly on large gas projects, of which more than half are currently underway or committed. This high level of investment will maintain the employment level and puts to bed the idea of the mining sector collapsing.

Plus, let’s not underestimate how lucrative the production stage of the mining industry could be. Back in the 1970s, about one million tonnes of iron ore was being shovelled from the ground each week. Now it’s about 1.5 million tonnes a day. That’s a lot of money coming into the state.

Conclusion

It’s not the first time we’ve heard the Perth market described as a ‘bubble’ and it won’t be the last. While many experts, who are actually involved in the market, have helped to dispel the bubble myth, it still has an impact.

My biggest concern is that the misinformation spreads concern amongst the uninformed and ultimately robs them of the opportunity to invest.

Will property values drop? Perhaps in some areas. But this is all a normal part of the cycle.  The latest data reveals that growth in Perth has already moderated, and the number of properties for sale may be increasing (though it’s still very low in historical terms). But I’m confident we still have growth in the market and the long-term fundamentals are very strong.

[post_ender]



Want more of this type of information?


Damian Collins

About

Damian is managing director of Momentum Wealth, a Perth based property investment consultancy firm. A successful property investor in his own right, Damian formed Momentum Wealth to assist time poor investors in building their portfolios and applies his many years of experience to help clients accelerate their wealth creation. Visit www.momentumwealth.com.au


'Why Bubble Predictions Don’t Carry Any Weight- Damian Collins' have no comments

Be the first to comment this post!

Would you like to share your thoughts?

Your email address will not be published.
CAPTCHA Image

*

0
0

Michael's Daily Insights

Join Michael Yardney's inner circle of daily subscribers.

NOTE: this daily service is a different subscription to our weekly newsletter so...

REGISTER NOW

Subscribe!